Entry No: 1494 Undergraduate Page 1 of 13 Youth unemployment in South Africa: causes and counter-measures South Africa is currently struggling with large unemployment amongst the youth. The National Development Plan has identified a number of policy interventions to improve youth employment. In your view, what are the causes of youth unemployment and what should government do to improve the levels of youth employment? Identify the pros and cons of each of your proposals. Word count: 2200 words (incl. footnotes, excl. headings, references, & in-text references)
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Entry No: 1494
Undergraduate Page 1 of 13
Youth unemployment in South Africa:
causes and counter-measures
South Africa is currently struggling with large unemployment amongst the youth. The
National Development Plan has identified a number of policy interventions to improve youth
employment. In your view, what are the causes of youth unemployment and what should
government do to improve the levels of youth employment? Identify the pros and cons of
workers are seen as risky to employ, thus increasing their real cost (National Treasury,
2011:5-6). The causes of South African youth unemployment then, are a combination of
deficient demand for labour, due to the increasingly skills-intensive orientation of the South
African economy, and substandard supply, caused by the emergence of risky low-skilled
youth.
4.1 Approaching remedies: broad focus
Godfrey (2003:1) proposes an analytical framework which sorts unemployment-reducing
policy interventions into being either preventative or curative. Preventative measures are
those which aim to address the causes of a problem, whereas curative measures address
symptoms, and he argues that preventative solutions are generally superior (Godfrey,
2003:1). With the principal cause of youth unemployment being a structural mismatch of
skills, it follows that preventative measures would aim to address this.
In looking to address the fundamental issue of unskilled, deficient labour supply, the key
preventative reform is instituting higher quality, more widely accessible education (National
Treasury, 2011:19). This has been recognised by the National Planning Commission
(2012:70-71) and the South African Government, with a number of policies having been
formulated (National Treasury, 2011:9) and more than 20% of national expenditure being
allocated towards education, including R23 billion towards infrastructure development
(Gordhan, 2013:25, 33). However a number of issues in education remain unresolved, and a
long-term reduction of youth unemployment requires that they be better addressed (Equal
Education, 2013).
The second preventative development required is rapid and sustained inclusive economic
growth, which would address deficiencies in the demand for young low-skilled labour.
Sustained inclusive growth between 2003 and 2008 created in excess of 2 million jobs, and
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lowered the strict unemployment rate from 27.1% to 21.9% (National Treasury, 2011:10).
The employment growth of this period was higher than in most other emerging economies
and was highly labour-absorbing (National Treasury, 2011:18), as can be seen in Figure 2.
The importance of growth for employment was emphasised in a negative fashion after the
2008 global recession, which resulted in the loss of 1 million South African jobs and
disproportionately affected young people (National Planning Commission, 2011:6).
It is important to note that while the above two preventative measures do address the
underlying causes of youth unemployment, the realisation of their aims will occur only in the
long-run. There is therefore a need for policy which will address at least the symptoms of
youth unemployment in the short-term (Levinsohn, 2007:22). These curative measures,
called active labour market policies (ALMPs), aim to quickly improve the employability of
the youth and increase demand for labour (National Treasury, 2011:19-20). The ALMP this
paper focuses on is the youth wage subsidy as proposed by the National Treasury (2011) and
the Democratic Alliance (2012).2
4.2 Narrow focus: youth wage subsidy
The youth wage subsidy suggested by the National Treasury (2011:7) is a tax rebate awarded
to employers when they employ low-skilled workers between the ages of 18 and 29 who earn
below the income tax threshold. The maximum value of the rebate per worker per year is
R12 000, and it will be available for a maximum of two years, with a number of factors
determining the size of the grant in specific cases (Yu, 2012b:11).
The purpose of the subsidy is to boost labour demand, and in doing so increase employment
(National Treasury, 2011:24). The mechanism through which this occurs is by reducing the
cost of employing a young person, and therefore mitigating the financial risk associated with
hiring inexperienced low-skilled youth (Yu, 2012b:12). This reduces the gap between the cost
of employing a worker and that worker’s productivity, while leaving wages unaffected (Yu,
2012b:12). In addition to achieving short-term employment, it is hoped that young people
will develop on-the-job skills, and will be productive enough by the end of the subsidised
period to retain employment, or find unsubsidised employment elsewhere (National Treasury,
2011:10). Even in the absence of significant human capital development, young workers will
likely be more employable after subsidised employment, as an unemployed young person in
2 In the absence of space constraints other ALMPs deserve attention, such as training programmes, entrepreneurship schemes, job-matching initiatives and public sector employment creation.
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South Africa is three times more likely to find work if they have prior work experience
(National Treasury, 2011:7). The National Treasury (2011:7) estimates that its proposed
subsidy would result in a net increase of 178 000 jobs at a cost of R28 000 per job.
However youth wage subsidies may be associated with a number of negative effects.
Deadweight loss occurs when a subsidy is paid for a worker who would have found that
employment without subsidisation (Yu, 2012b:13), and must be included in the total cost
when evaluating the cost per new job.
Substitution effects3 are a commonly objected to aspect of wage subsidies. In South Africa
substitution effects are minimised via strict labour laws and because young inexperienced
workers are not suitable substitutes for productive older workers (National Treasury, 2011).
However COSATU (2012) argues that increasing labour casualisation and the expansion of
labour brokers works in the opposite direction, increasing to some extent the probability of
labour substitution taking place.
Because costs associated with dismissing workers are relatively high in South Africa, writers
such as Levinsohn (2007:11) argue that they limit employment by increasing risk for
employers, and consequently decreasing demand for labour. In order to mitigate this effect,
Hausmann (2008) argues that the first 10 weeks of subsidised employment should be a
probationary period, during which subsidised employees can be fired without reasons being
given. In defence of the above proposal, Levinsohn (2011:13) argues that the potential for
harmful destructive churning4 is mitigated by training costs and increased worker
productivity which comes with experience.
Puerto (2007:8-9) finds clear empirical evidence which suggests that wage subsidies have
better than average efficacy in increasing employment compared to other ALMPs, and that
ALMPs generally are particularly effective in developing countries. This finding is
supported by Davies and Thurlow (2010:453-454), who determine that youth subsidies are
effective at increasing youth employment probabilities. This pattern is emphasised by
evidence of wage subsidy programs increasing employment in Australia, Denmark and
Turkey (National Treasury, 2011:31-32). COSATU (2012) provides an example in Poland of
3 These occur when already-employed non-subsidised workers are fired so employers can hire subsidised workers and extract the subsidy rent (Yu, 2012b:13). 4 The process whereby employers keep subsidised employees only for the duration of the dismissal period and then fire them for other subsidised workers, so as to extract subsidy rents without committing to sustained employment (Yu, 2012b:14).
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subsidies decreasing long-term employment prospects, but this appears in context to be the
exception rather than the rule.
It seems clear that youth wage subsidies are effective and useful labour market interventions.
They are not a panacea for youth unemployment, but address its symptoms relatively
successfully, though on a small scale. This paper would adjust the National Treasury’s
proposal by instituting a probationary dismissal period as suggested by Hausmann, in order to
increase the subsidy’s employment effect. This would be complemented with a requirement
that firms report their dismissals of subsidised workers to the subsidising authority, with
firms found to be abusing the dismissal period being penalised.
4.3 Narrow focus: the potential of informal markets
Apart from ALMPs, this paper argues that there is another space in which to expand youth
employment. Because of South Africa’s significant formal sector unemployment, it is
expected that the country would have a relatively large informal sector (Yu, 2012a:158).
However, the opposite is true, and as Table 2 shows, the South African informal sector is
exceptionally small relative to other developing countries (Kingdon & Knight, 2003:391).
An informal sector has significant capacity to absorb employment, and is traditionally seen as
an alternative to limited opportunities available in the formal sector (Wellings & Sutcliffe,
1984:520). In addition, it is generally more labour intensive than the formal sector, and low-
skilled people without experience of formal employment make up a significant part of the
informal working population (Kingdon & Knight, 2003:403). It has been empirically shown
that people are better off working in the informal economy than they are when unemployed
(Ligthelm, 2006:45), and Fasanya & Onakoya (2012) find that informal market activities
have had a positive impact on employment generation in Nigeria.
It is important to recognise that informal employment is not ideal, and is a poor substitute for
formal sector jobs (Aliber, 2003:487). However it is an improvement upon unemployment,
and for young unemployed South Africans it can serve in the short-term. Recent moves by
national government to increase informal sector regulation through the Licencing of
Businesses Bill seem ill-advised, as they are likely to increase the costs of informal traders
and further stunt the sector (SAITA, 2013). Significant potential can be unlocked if
restrictive regulations are removed (Yu, 2012a:158), and this low-cost, high-potential area
deserves greater development.
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5. Concluding remarks
It is clear that South Africa faces a serious problem of very high unemployment amongst
young people. It has been shown that this is primarily due to the structure of the South
African economy, which is moving towards becoming more skills-intensive while a
significant number of its participants have little to no hard skills. It was argued that
ultimately remedies for these structural difficulties are in education development and
inclusive economic growth, but it was realised that these are long-term solutions, and more
immediately appreciable policies are required. From here the paper recommended a youth
wage subsidy with a regulated dismissal period, and then proposed that government should
stimulate growth in South Africa’s informal markets, which have significant employment
absorption potential.
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6. Tables and figures
TABLE 1: Labour absorption rate of formal economy, 1980 – 2005
Source: Ligthelm, 2006: 38.
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TABLE 2: Comparative unemployment and informal employment rates
Source: Kingdon & Knight, 2003: 392.
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FIGURE 1: Distribution of unemployment by age group
Source: National Treasury, 2011: 13.
FIGURE 2: Employment growth and the employment elasticity of growth, 2004 – 2008
Source: National Treasury, 2011: 18.
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7. Reference list
Aliber, M. 2003. Chronic Poverty in South Africa: Incidence, Causes and Policies. World
Development, 31(3), p. 473.
Congress of South African Trade Unions (COSATU). 2012. The Youth Wage Subsidy in
South Africa: Response of the Congress of South African Trade Unions (To the
National Treasury and Democratic Alliance). COSATU.
Davies, R., and J. Thurlow. 2010. Formal-informal economy linkages and unemployment in
South Africa. South African Journal of Economics, 78(4), p. 437.